Unit 1.3 2016 students.pdf

8/17/2019 Unit 1.3 2016 students.pdf

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Outcomes

• Explain and illustrate: – the price-consumption curve – the effect of a change in price and a change in

income on the consumer’s equilibrium for both anormal and inferior product

– the income-consumption curve – How the income and substitution effect can be used

to explain consumers reaction on price sensitive andnon-price sensitive products.

– Engel –curves for different products


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The Effect of Changes in Price

• Price-consumption curve (PCC): for a

good X is the set of optimal bundles tracedon an indifference map as the price of Xvaries (holding income and the price of Y

constant).

• Purpose: used to derive demand curve

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Figure 4.1: The Price-Consumption

Curve

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Figure 4.2: An Individual Consumer’s

Demand Curve

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The Effects of Changes in Income

• Income-consumption curve (ICC): for a

good X is the set of optimal bundles tracedon an indifference map as income varies(holding the prices of X and Y constant).

• Engel curve : curve that plots therelationship between the optimal quantity of

X consumed and income.- Normal product : one whose quantity demanded rises as

income rises.

- Inferior product : one whose quantity demanded falls asincome rises 6


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The Effects of Changes in

Income• Normal good : one whose quantity

demanded rises as income rises.

• Inferior good : one whose quantitydemanded falls as income rises.

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Figure 4.3: An Income-Consumption

Curve

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Figure 4.4: An Individual Consumer’s

Engel Curve

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Figure 4.31: Engel Curves for Different

Types of Goods

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Average Income (R/wk) Average Income (R/wk)

0 0


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Engel curves• Difference between products:

– Normal products

– Luxury products – positive slope + elastic(flatter)

– Necessities – positive slope + inelatic

(steeper)

– Inferior products – negative slope


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Figure 4.6: The Total Effect

of a Price Increase

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Figure 4.7: The Substitution and Income Effects

of a Price Change for a Normal Good

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Figure 4.8: Income and Substitution

Effects for an Inferior Good

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Figure 4.12: Income and Substitution

Effects of a Price Increase for Salt

Y (R/mo)

Salt (kg/mo)

Salt (kg/mo)

Y (R/mo)

1 500 3 000

0.5 0.5002 0.5001

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Figure 4.31: Engel Curves for Different

Types of Goods

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Average Income (R/wk) Average Income (R/wk)

0 0


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Engel curves• Difference between products:

– Normal products

– Luxury products – positive slope + elastic(flatter)

– Necessities – positive slope + inelatic

(steeper)

– Inferior products – negative slope

Documents

Unit 1.3 2016 students.pdf